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Tuesday, April 14, 2009

Detroit Publishing Co. NOLA Streetcar 1900 Royal Street, New Orleans. The sign on the car reads CLIO ST.

Ilargi: We come out of the Easter holidays with messages of hope from Bernanke and Obama, against the backdrop of collapsing retail sales and surging bankruptcies. Somehow I doubt their speeches would have been the same if they'd known the new data, but then again, the act has become a true spectacle for quite some time now. Bernanke has made the "what we will do once the recovery is here" theme a recurrent line in all his speeches, no matter that nothing is recovering. In an economy whose GDP leans for over 70% on consumer spending, an almost 10% drop in retail sales is a disaster, even if remaining 30% were doing great, which they're not.

It would be one thing if people were saving the money that's not being spent. but they're not; they simply don't have it, nor can they borrow it. If the US GDP is $14 trillion (though I'm sure that is too high a number by now), a 10% drop in 70% of its make-up would take about $1 trillion out of the picture. That's some serious money, even if we're getting used to big numbers, it's over $3000 for every man, woman and child, or $12.000 that a typical family spends less. For the smile of the day, we turn to Goldman Sachs. Earlier, the firm announced a $5 billion new fund to buy up distressed assets at 1930's style basement prices.

Today its CFO ups the ante a tad: Goldman has a $168 billion chest with which it plans to purchase the strategic places on the continent. Oh, but that's not the part that made me smile. This is: as long as Goldman has not repaid the $10 billion TARP funds, they are not allowed to pay off Warren Buffett's $5 billion loan, and they have to pay the old geezer $1.3 million in interest every single day. Somehow that little fact also made me wonder about Goldman's claims that they never really needed any money. If that were true, why did they ever make that deal, on those terms (10% interest), with Buffett?

Goldman Sachs has amassed a warchest of $164bn in cash and liquid assets that could be used to buy distressed securities and loans as its rivals clear their balance sheets of such holdings, Goldman’s chief financial officer said on Tuesday. David Viniar, Goldman’s CFO, spoke as the bank completed the sale of $5bn in common stock - at $123 per share - which it plans to use to pay back some $10bn from the government’s Troubled Asset Relief Programme (Tarp). The sale price represented a 5.5 per cent discount to Monday’s close. Goldman shares were down 6.3 per cent at $121.92 in midday trading on Tuesday in New York.

Speaking a day after Goldman reported $1.81bn in first-quarter earnings, Mr Viniar said the bank’s liquid assets - which rose more than $50bn in the first quarter - also could be put to defensive use should the crisis worsen. Goldman’s earnings were paced by a record $6.5bn in revenues in fixed income, commodities and currencies (FICC) activities. It made money taking advantage of the wide difference between buying and selling prices in those markets. “The environment in the first quarter was such that, you know, there were so many opportunities in truly liquid assets that there was no need to use liquidity to buy illiquid assets and there weren’t a lot of good illiquid assets for sale”, Mr Viniar said, adding that strong liquidity made sense “from a defensive and offensive point of view”.

Mr Viniar acknowledged that the liquidity position was a drag on earnings and return-on-equity ratios, but said in the current environment, “prudence is the better path”. He warned that his firm’s record-setting FICC performance would be hard to repeat. But he noted that overall activity in the capital markets was gaining momentum, pointing to two dozen equity offerings last week and a pair of IPOs this week. “Capital markets activity is really starting to pick up and if the equity markets hold, given the need many companies have for equity, I think you will see a pretty big pickup in capital markets activity”, he said. In an interview with the Financial Times, Mr Viniar said Goldman wanted to pay back the $10bn in Tarp funds as soon as possible so it could pay bankers, invest money abroad and hire foreign workers without generating criticism that it was using taxpayer money for such purposes. “It’s important to run our business the way it ought to be run,” he said.

Goldman Sachs’s Wall Street rivals were mad at Lloyd Blankfein’s disdain of their bonuses last week — so they must be absolutely livid today. Goldman’s results this quarter seem to include several challenge to lawmakers in a sign that the firm is intent on managing its bonuses and its trading risk without an eye on Congressional approval. Goldman Sachs posted a $1.7 billion profit today — and with it, Goldman set aside $4.7 billion for salaries and bonuses. That $4.7 billion is 50% of Goldman’s revenues for the quarter, a jump up from the same time last year, when salary and bonuses accounted for 48% of Goldman’s revenues. In essence, things are still ugly in the market — but even so, Goldman actually said it would reserve more money for staff salaries in the first quarter than it did last year. Goldman doesn’t actually have to pay those dollars until the fourth quarter, but the expenses estimate how much Goldman expects to pay.

Goldman’s boost to compensation costs comes even as the firm employs fewer people, having cut its headcount by 7% since the end of last year. What lies behind Goldman’s boost? It is certainly an interesting reversal of fortune for the bank. Every investment bank closely manages its ratio of compensation and benefits expenses to net revenues. During the boom times, banks struggled to keep the percentage of comp to revenues at around 55% or lower. When times got tough, some banks were successful in pushing the percentage below 50%. Goldman’s generous allotment for bonuses is partly a function of its higher revenues, according to the firm’s disclosure. Revenues are the denominator in the comp-to-revenues comparison, so when they rise the whole percentage rises. But that doesn’t account for the entire jump.

Goldman raised money from Warren Buffett last year partially to take less in TARP funds; now Goldman is the first big bank to rush to pay that TARP money back with a $5 billion capital-raise. It makes sense: without TARP funds to worry about, Goldman does not have to pinch pennies excessively or prepare itself for 90% bonus taxes. Goldman is also taking more and bigger risks, a sure way to tick off the government. Goldman increased its daily value-at-risk, which measures the average trading loss Goldman could take on 95% of the trading days. That VaR, as it is known, jumped to $240 million in the first quarter compared to $157 million for same time in 2008.

On Friday, Deal Journal wrote about how other investment banks were not pleased that Goldman CEO Lloyd Blankfein called their bonuses excessive, "greedy and self-serving." Some rivals didn’t believe that Goldman deserved the moral high ground, particularly given that Blankfein had made $68.5 million and was the highest-paid bank CEO at the height of the market. As Goldman throws off its government yoke, however, rivals should stop fretting about Goldman’s claim to the moral high ground and instead worry that Goldman may make it to the financial high ground completely unimpeded.

Goldman Sachs Group Inc. raised $5.5 billion to buy interests in private-equity funds just as owners such as endowments and pensions are being forced to offer steeper discounts for their buyout holdings. Median bids for the so-called secondary interests dropped to about 36 cents on the dollar, down from more than 80 cents last January, according to Nyppex LLC, which trades stakes in private-equity funds and tracks pricing. Goldman Sachs gathered commitments for its fifth fund dedicated to secondary purchases that could range in value from $1 million to more than $1 billion, the New York-based company said in a statement today.

The fund is designed to take advantage of distress at endowments such as Harvard University and pensions including the California Public Employees’ Retirement System, which have sought to unload buyout stakes as their overall assets plunged. "It’s the most active part of the marketplace right now," said John Morris, a managing director at Harbourvest Partners LLC in Boston, which manages $30 billion in private-equity and venture stakes. "You could look at something for 60 cents on the dollar today. But if you wait until next week you could be buying it for 50 cents on the dollar." The falling prices have had a hand in stalling the market, Morris said. Would-be buyers, eyeing an estimated $120 billion of interests that could come into the market, are wary that the underlying assets -- the companies owned by private-equity firms -- may fall further in value, driving down prices even more. That’s keeping buyers on the sidelines.

Potential sellers in need of cash are searching for alternative means of raising capital. Harvard, which failed to fetch acceptable prices for some of its private-equity holdings, sold $2.5 billion in bonds to cope with losses in its endowment that could reach 30 percent by the end of its fiscal year in June. The 64 percent median discount is nearing the all-time high of 2003, when buyers were able to command prices of 71 percent below par, according to the Nyppex research. "Goldman’s timing is excellent," said Laurence Allen, managing member of Greenwich, Connecticut-based Nyppex. "The returns of the top funds are substantially higher when the vintages are in recession."

The best-performing private-equity funds raised in the most recent recessionary periods of 2001 and 2002 produced returns of 40 percent and 32 percent respectively, compared with the gains of 17 percent and 11 percent for funds raised in the boom years of 2005 and 2006, Allen said. Secondary funds being raised this year will likely fare well even after factoring in writedowns of assets because of mark-to-market accounting, Allen said. The new Goldman Sachs fund will likely return at least 20 percent a year, he said. Those sorts of returns are attractive to investors who’ve seen traditional leveraged buyouts evaporate amid the worldwide credit crisis. Announced private-equity deals dropped more than 60 percent last year to about $211 billion, according to data compiled by Bloomberg.

Some buyout funds are being priced at zero, with sellers paying buyers to take over their future capital commitments, Allen said. Those funds were raised during the 2006 and 2007 years, where firms overpaid for purchases and are now the most vulnerable to writedowns, he said. The Goldman Sachs fund is the firm’s biggest in that area to date, following a $3 billion fund raised in 2007. The firm and some of its employees invested in this latest pool, comprising less than 10 percent of the total, according to a person familiar with the fund who declined to be named because those details weren’t made public.

Goldman Sachs Group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government's thumb. On Monday, Goldman took fresh steps to break free: It announced, as expected, that it plans to raise $5 billion by selling new common shares to investors, and that it would like to use the money to repay government bailout money received last year. The firm also reported stronger-than-expected first-quarter earnings of $1.81 billion. Goldman managers have a big incentive to escape the state's clutches. Last year, 953 Goldman employees -- nearly one in 30 -- were paid in excess of $1 million apiece, according to people familiar with the matter. But tight federal restrictions connected to the financial-sector bailout have severely crimped the Wall Street firm's ability to offer such lavish pay this year.

At a meeting President Barack Obama hosted with bank executives at the White House in late March, Lloyd Blankfein, Goldman's chief executive, argued that banks needed freedom to repay the loans the U.S. forced them to accept in October. Eight large institutions received a total of $165 billion in capital, including $10 billion for Goldman. The pay restrictions were tied to those loans. The banks were told then that everyone had to accept the money so it wouldn't be obvious who needed it most. "Those who could pay it back have an obligation to do so," Mr. Blankfein urged the president, according to attendees. Mr. Blankfein, who was paid $68.5 million in 2007, added that the pay caps and other factors are "going to limit our ability to compete, both here and abroad."

The federal government's management of the financial crisis is entering a new phase. The trillions of dollars Washington has committed to help stabilize companies and thaw frozen credit markets have enmeshed the government deep in the affairs of investment banks, insurers and auto companies. Now that stock and bond markets have rebounded a bit, and pressure is easing for some financial firms, the government has to begin deciding how tight a grip to maintain on some companies, and for how long. If Goldman is permitted to repay its loan, it would be the first big bank to do so. That would set the stage for the firm to once again pay its executives, traders and bankers -- long among Wall Street's highest paid -- as it sees fit.

But an early repayment could pose a risk to other banks that received government money, by rekindling investor concerns about their health. Morgan Stanley, for example, which is expected to report a first-quarter loss, isn't likely to quickly repay the U.S., according to banking executives and government officials. Will other profitable banks rush to repay, deepening the divide between the haves and the have-nots? And what would happen if there's another financial shock and banks are forced to ask for more U.S. funds?

A handful of smaller banks already have taken steps to repay the government. The U.S. has indicated it won't allow any major banks to do so before the government considers the results of financial "stress tests," which are expected by April 30. The tests measure banks' ability to continue lending through a severe and prolonged economic downturn. Because of the technicalities of the loans, it could take months before Goldman or any other big bank that repays will escape the government's clutches. The 140-year-old firm long has boasted a culture of lucrative compensation. Although overall Goldman pay fell last year, the firm, which has about 30,000 employees, paid 953 people more than $1 million in salary and bonus, according to people familiar with the matter.

No one got more than $1 million in cash; much of the pay was through stock grants that vest in the future, these people say. (At Merrill Lynch & Co., which had roughly twice as many employees, 696 executives were paid more than $1 million last year, according to data released by New York Attorney General Andrew Cuomo.) In 2008, the pay of Mr. Blankfein and three top Goldman lieutenants fell 97%, to a total of $9.3 million. Firms are chafing under new legislative rules dictating that bonuses can account for no more than one-third of the total annual pay to top earners at companies receiving government money. The Obama administration also has endorsed capping salaries at $500,000 at some firms receiving significant U.S. aid. The government also restricts companies accepting U.S. funds from increasing dividends and from buying back their own stock, among other things.

Mr. Blankfein now uses Amtrak's Acela Express train to shuttle between New York and Washington to make his case with government officials. That's a far cry from the private plane Goldman executives have used in the past. Some Goldman partners, careful not to appear to be spending taxpayer money, now use their personal credit cards when paying for client entertaining. Employees visiting New York now stay at an Embassy Suites hotel rather than the tony Ritz-Carlton where they used to bed down. Goldman has fared better than most rivals during the crisis, but was hammered nonetheless after Lehman Brothers Holdings Inc. filed for bankruptcy protection in September. Goldman's stock sank to $108 on Sept. 18, less than half its high of more than $247 a share in October 2007.

Even then, Goldman executives didn't believe the firm needed U.S. money. On Sept. 23, as the financial crisis intensified, Goldman raised $5 billion from Warren Buffett's Berkshire Hathaway Inc. Goldman hoped the investment -- preferred stock with a steep 10% annual return -- would reassure investors. Goldman raised another $5.75 billion in a common-stock offering. Mr. Blankfein spoke up when nine big banks were called to the emergency meeting in October where the Treasury Department unveiled its plan. "This is pretty vague," Mr. Blankfein told then-Treasury Secretary Henry Paulson, attendees say. "What are the terms?" The U.S. did more than give the banks money. In exchange for the capital, it also received warrants, a security that gives the holder the right to buy common stock at a certain price. Paying back the money doesn't end the government's ability to exercise those warrants and own common stock in the banks. To formally end the government's involvement, the Treasury must sell the warrants back to the bank or to private investors.

It didn't take long for Goldman investors to raise concerns about Washington's grip. At a Nov. 11 conference at New York's Grand Hyatt hotel, an audience member grilled Mr. Blankfein. "Some of the politicians are questioning companies who have accepted...money as to whether they should be paying bonuses this year," the attendee said. "And I'm wondering...how you're thinking about your ability to continue to compensate your staff the way you have in the past?" Mr. Blankfein replied: "We hear those voices and we take it into account." Six days later, Goldman said its board decided that senior executives would take no bonuses. The numbers were released in mid-December. Money set aside for pay and benefits fell 46% to $10.93 billion. Most partners, the firm's elite, saw bonuses fall by about 70%, according to people familiar with the matter.

All costs were being scrutinized by then, due to heightened public scrutiny and declining profits. Goldman employees working late now are entitled to only $20 in reimbursement for dinner, a 20% reduction. Car-service rides home aren't free until 10 p.m., an hour later than before. At a Goldman partners meeting in early January, Mr. Blankfein said repaying the federal money was a priority. The firm took the message public at an investor conference on Feb. 4. "Operating our business without the government capital would be an easier thing to do," said David Viniar, Goldman's chief financial officer. "We'd be under less scrutiny and under less pressure." Goldman's shares rose 6.2% that day, to $87.97. Goldman aimed to spin the message more broadly at a congressional hearing on Feb. 11. It was Mr. Blankfein's first-ever congressional appearance, and he spent hours preparing.

Mr. Blankfein played diplomat. "When conditions allow, and with the support of our regulators and the Treasury, we look forward to paying back the government's investment so that money can be used elsewhere to support our economy," he testified. On Feb. 26, the Treasury sent an email to Goldman's finance department containing the financial stress test. Mr. Viniar, Goldman's CFO, ordered his staff to work around-the-clock so Goldman could return the questionnaire by Monday, four days later. But the Treasury told the firm it had to wait until its review was concluded later this month before the U.S. would entertain a repayment of the money, according to people familiar with the matter. A public uproar last month over bonuses paid to American International Group Inc. employees only heightened Goldman's urgency. The AIG bonuses prompted a House bill to slap a 90% tax on bonuses for those receiving pay of $250,000 or more at firms that received more than $5 billion in government funds.

Some Goldman executives privately discussed repaying $5 billion -- half its government loan -- or more, say people familiar with the matter. That would have exempted Goldman from the bill taxing bonuses. The bonus-taxing measure fizzled after President Obama expressed reservations. Soon, a prominent government official indirectly suggested a course of action that might pave the way for a payback. On March 15, Federal Reserve Chairman Ben Bernanke said in a "60 Minutes" television interview that the day a bank could raise private capital would be an important milestone. "Right now, all the private money is sitting on the sidelines saying: 'We don't know what these banks are worth. We don't know that they're stable,'" Mr. Bernanke said. Two days later, at a monthly meeting of Goldman's nearly 400 partners, Mr. Blankfein said it may be "prudent" for Goldman to raise capital, say attendees.

He has sought political backing. Mr. Blankfein has met twice with Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee. Messrs. Blankfein and Frank discussed repaying government funds, among other things, says Mr. Frank. "I think it's a sign of strength" for Goldman to seek to repay U.S. money, Mr. Frank said in a recent interview. Some Goldman rivals are less likely to repay their loans right away. At the March 27 White House meeting with President Obama, Morgan Stanley's Chief Executive John Mack struck a different tone. Analysts estimate that his firm faces a first-quarter loss of approximately $100 million. A quick payback of U.S funds would "undercut the purpose" of the Treasury's Troubled Asset Relief Program, or TARP, for large banks, Mr. Mack told President Obama, attendees say.

Treasury Secretary Timothy Geithner indicated recently that healthy banks will be able to repay bailout money, and that the Treasury was considering those repayments in its calculations about how much TARP money remains. The Bush administration had said that even healthy banks had to keep the money until the crisis passed. A provision in the recently passed stimulus bill mandates that TARP recipients be allowed to repay the funds, as long as their primary regulator approves the move. At least one Goldman shareholder has benefited with the government in the picture. The 10% annual payout Mr. Buffett's Berkshire Hathaway receives on its $5 billion investment earns it more than $1.3 million each day. As long as Goldman holds the government's money, it can't pay off Mr. Buffett without U.S. approval.

On April 3, 2009, R. Glen Ayers spoke at the American Bankruptcy Institute in Washington, D.C. Mr. Ayers is a former bankruptcy judge, now with the law firm Langley & Banack in San Antonio, Texas. He spoke on a subject I covered here on March 4 – not all mortgage backed securities are actually backed by mortgages. The rush to write more mortgages and to issue more bonds meant that mistakes were made in the paperwork.

The Ayers speech is connected to an article he wrote with Judge Samuel L. Bufford, who had the California case I mentioned last month where the mortgage note disappeared after being transferred to Freddie Mac. In the article, "Where’s the Note, Who’s the Holder", they drop this bombshell: "A lawyer sophisticated in this area has speculated to one of the authors that perhaps a third of the notes ‘securitized’ have been lost or destroyed." Meaning that 1/3 of the mortgage-backed securities are not backed by mortgages!

This is the junk that Treasury Secretary Geithner wants to finance the hedge funds to purchase. As of the end of 2008, there was $6,838.7 billion worth of government-backed mortgage bonds outstanding. An additional $178 billion were issued in the first two months of 2009. Scary stuff. No wonder the hedge funds are giving Geithner’s Public-Private Investment Partnership "two thumbs-down."

Retail sales for March fell 9.4 percent compared with a year ago, according to a report April 14 from the U.S. Census Bureau, as the recession took a big bite out of consumer spending. Total sales for the month amounted to $344.4 billion. Retail sales were down 1.1 percent from February to March, indicating a deepening trend. Total sales for the first quarter were down 8.8 percent from a year ago, the Census Bureau said. Retail trade sales were down 1.1 percent from February and 10.7 percent from a year ago. As gasoline prices dived, sales tumbled 34 percent from March 2008. Motor vehicle parts dealers, whose prices have not fallen so hard, reported sales were down 23.5 percent.

Ilargi: For some reason -I won't venture a guess- very few sources noted that year over year prices fell 9.4%. They all stick with a 1.1% fall over last month. Curious. All of a sudden we're scared of big numbers?!

U.S. retail sales unexpectedly plunged during March in a broad-based decrease that threw a shadow over recent signs of improvement in the slumping economy. Retail sales decreased by 1.1% compared to the prior month, the Commerce Department said Tuesday. Economists expected an increase of 0.3%. Sales in February were revised up, increasing 0.3% instead of dipping 0.1% as originally reported. January sales were revised up to an increase of 1.9% from an increase of 1.8%. The big decline in March sales was a disappointment. The increases in January and February sales had temporarily ended a freefall in consumer spending during the second half of 2008. People seemed to be braving a pitiless job market and pulling out their wallets again, which is good for the economy. Consumer spending makes up 70% of gross domestic product, the broad measure of economic activity.

Other signs have emerged the economy might be stabilizing. Big bank Wells Fargo last week projected net income of $3 billion in the first quarter, well above analysts' expectations. The optimistic earnings report within the suffering banking sector pushed up the overall stock market. And the government Thursday reported the U.S. trade deficit shrank 28% in February. Analysts said the sharp drop limited the size of the first-quarter fall of GDP. GDP plunged 6.3% in the fourth quarter, which may have been the pit of a recession that started in December 2007. Retail sales, a key indicator of consumer spending, fell July through December last year.

But instead of extending hopes of consumer confidence, Tuesday's retail sales data seemed a setback. Housing-sector sales dropped sharply in March, with furniture retailers down 1.7% and building material and garden supplies dealers sliding 0.6%. Another sector that has weighted down the economy is cars. Year over year, auto and parts retail sales have fallen 23.5% since March 2008. March 2009 sales fell 2.3% compared to the prior month. Excluding autos, all other sales dropped 0.9% -- bigger than the 0.1% dip expected by economists. Auto sales dropped 3.0% in February and ex-auto sales that month rose an upwardly revised 1.0%.

March gas station sales retreated 1.6%, after rising 3.1% in February. Stripping away sales at gas stations, demand at all other retailers decreased 1.1% in March. Excluding auto sales and gas station sales, all other retailers saw sales fall 0.8% in March. Sales last month decreased 1.8% at clothing stores; 5.9% at electronic stores; 0.2% at general merchandise stores; 1.7% at mail order and Internet retailers; 0.9% at sporting goods, hobby, book and music stores; and 1.4% at eating and drinking places. Sales rose 0.4% at health and personal care stores and 0.5% at food and beverage stores. U.S. producer prices posted the biggest drop so far this year in March after two straight months of gains on the back of falling energy costs, though core prices remained steady. Price pressures deeper in the production pipeline declined last month, as well, as prices on both intermediate goods and raw materials fell for the eighth month in a row.

The data could raise concerns about the risk of deflation as the Federal Reserve continues to take extraordinary measures to support the weak economy and strained financial markets, though few policymakers have expressed much concern about a deflationary spiral thus far. The producer price index for finished goods fell 1.2% on a seasonally adjusted basis in March, the Labor Department said Tuesday, after rising 0.1% in February. Last month's drop was much bigger than the 0.1% decline predicted by economists in a Dow Jones Newswires survey, and was the largest since the 3.9% decrease in December. PPI was off 3.5% from March 2008, the largest annual decline since January 1950. Core PPI, which excludes food and energy costs, was unchanged last month from February, versus expectations for a 0.1% increase. It was up 3.8% from a year ago.

Last week, a government report showed the first gain in U.S. import prices in eight months in March amid a jump in oil prices. However, consumer prices due out Wednesday are expected to ease a bit. The PPI data showed energy prices sliding 5.5% last month, after rising 1.3% in February. Wholesale gasoline prices decreased 13.1%. Food prices, meanwhile, were down 0.7%. Prices of passenger cars fell 0.2%, while light truck prices declined 0.4%. Deeper in the production pipeline, declining prices suggested that deflationary pressures would remain in place. Prices of raw materials, known as crude goods, fell 0.3% on the month. Core crude goods prices decreased 1.6%. Intermediate goods prices fell 1.5%, while core intermediate goods decreased 0.3%.

The number of U.S. businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found. "There's no end in sight," said bankruptcy lawyer Bryan Elliott of Hickory, N.C., who is working seven days a week and scheduling prospective clients a month in advance. "To be doing this well and having this much business, it is depressing. It's not a laugh-a-minute job." Nearly 1.2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analyzed by the AP. Last month, 130,831 sought bankruptcy protection -- an increase of 46 percent over March 2008 and 81 percent over the same month in 2007.

Bob Lawless, a professor at the University of Illinois College of Law, said bankruptcies could reach 1.5 million this year and level off at 1.6 million next year -- around the same time economists expect an economic recovery to begin. Congress voted in 2005 to make bankruptcy more cumbersome after years of intense lobbying from the nation's lenders, who complained that people were abusing the system. Before the move to change the law, bankruptcies were running at what was then an all-time high of about 1.6 million per year. The tighter requirements initially appeared to work, with bankruptcies plummeting from a record-shattering 2 million cases in 2005 -- a total that reflected a rush to file before the new law took effect -- to 600,000 in 2006. But now bankruptcies are booming again. "You wouldn't get this large of a rise without serious problems in the economy," said Lynn LoPucki, a UCLA law professor who researches bankruptcy.

The bankruptcy rate is climbing as well. In the past 12 months, about four people or businesses for every 1,000 people in the country filed for bankruptcy, according to the AP analysis. That is twice the rate in 2006, and close to the average of about five for every 1,000 in the decade leading up to the change in the law. Lawless said the shame of bankruptcy may have eased somewhat in recent years, but added, "It's still a very stigmatizing, traumatic event for most everyone who files." Previous recessions also drove people to bankruptcy court, though those increases were more moderate. Bankruptcies went up 19 percent amid the economic contraction in 2001, and about 15 percent during the recession of the early 1980s, according to the Administrative Office of the U.S. Courts.

Bankruptcy is considered a lagging economic indicator, since it is generally a last resort. The filings compiled by the AP illustrate the places where the economic meltdown has hit hardest.In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 91 percent from a year ago. They were up 84 percent in Idaho, 82 percent in California and 79 percent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 127 percent jump. Emory Clark, an Atlanta bankruptcy attorney who has been in the business for 25 years, said he is seeing more affluent people, many who have lost their jobs. "There's something about human nature or American culture, but people hate filing for bankruptcy," Clark said. "It really is a stamp of failure. Nobody wants to come in here and pay us money to file. They are forced in because of circumstances."

Kathy Stevens of Vista, Calif., opened a tea and coffee boutique in August 2007, and it grew steadily. Then enrollment started to fall at a nearby mom-and-tot gym her customers frequented, and her business took a hit. The gym finally closed in the fall. Stevens and her husband spent more than $35,000 to keep the boutique afloat, drawing on their own money and donations from family. After working from 6 a.m. until almost 10 p.m., seven days a week for months on end, Stevens realized her store would not survive. The couple filed for bankruptcy two weeks ago. "You feel bad, because you never set out to do this," Stevens said. "We're trying to put it behind us and lick our wounds and move on." Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counseling sessions and a means test to assess debtors' ability to pay what they owed.

Lawless, the Illinois law professor, said his research found that the law simply increased the cost of filing by 50 percent and led many more people to cling to false hope longer. Many filers take a credit counseling class just a day before turning to the courts. Also, the law's test of a person's ability to pay off debts appears to have failed at one of its goals: steering debtors from Chapter 7, which allows people to sell off their assets to repay what they can and start again debt-free, and into Chapter 13, which places the filer in a repayment plan that can last for years. Chapter 7 cases accounted for 69 percent of all filings in the past year, compared with 71 percent in 2004. Lawless argued that only a tiny number of people were abusing the system before the 2005 shift, and that the law punishes those who genuinely need help. "The point of the bankruptcy system is to give the honest but unfortunate debtor a fresh start," Lawless said. "The fact that people are waiting longer to file shows just how mean-spirited the law is."

President Obama said on Tuesday that the battered economy was showing signs of recovery, but he warned Americans that more pain lies ahead and urged them to help build a foundation for a new, 21st century prosperity. Speaking just after a disappointing report on March retail sales made it clear that a sustained recovery is not yet at hand, the president delivered a speech that was part pep talk and part rebuke, not only for the once high-rolling members of the financial world but for politicians who he said had deferred tough decisions for too long. "I want every American to know that each action we take and each policy we pursue is driven by a larger vision of America’s future," Mr. Obama said in remarks at Georgetown University.

The White House had previewed the event as a "major speech" on the economy, but Mr. Obama did not break new ground. He did, however, use the occasion to reaffirm his determination to do something about the rising cost of health care and, later, to shore up Social Security. The president seemed to guard against being tagged as a "liberal." For instance, he defended his administration’s decision not to take over failing banks: "Governments should practice the same principle as doctors: first, do no harm." And at another point, he invoked religious imagery.

The president envisioned "a future where sustained economic growth creates good jobs and rising incomes; a future where prosperity is fueled not by excessive debt, reckless speculation and fleeing profit, but is instead built by skilled, productive workers; by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, innovations and discoveries that will shape the 21st century." "That is the future I see. That is the future I know we can have." But the near future will bring "more job loss, more foreclosures and more pain before it ends," Mr. Obama said. Underscoring his point was a Commerce Department report showing that consumer spending on a wide array of goods declined in March, reflecting a general spirit of uncertainty as well as continuing job losses.

The president said, as he has repeatedly, that the recently enacted stimulus plan, the efforts to strengthen the banking system and attempts to rescue the flagging American auto industry have all borne fruit, demonstrated in part by an increase in home-mortgage refinancings and more lending by small businesses. "This is all welcome and encouraging news, but it does not mean that hard times are over," Mr. Obama said, warning that 2009 will be a difficult year, and that no one should expect a return to full prosperity soon. As the president spoke, the Federal Reserve Chairman Ben S. Bernanke told an audience at Morehouse College in Atlanta that there were "tentative signs" that the decline in the economy was slowing.

President Obama called on Americans to take the long view. "There is no doubt that times are still tough," he said. "By no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope. And beyond that, way off in the distance, we can see a vision of an America’s future that is far different than our troubled economic past." Realizing that vision will require a new regulatory structure, one based on 21st century needs rather than an outdated financial buccaneer ethic, the president said. It will also require work on deep, complicated issues like health care and energy, he said. As Mr. Obama spoke inside Georgetown’s Gaston Hall, a small group of abortion opponents demonstrated outside against the presence at a Catholic university of a president who supports abortion rights.

Using a bullhorn, the protesters could sometimes be heard faintly in the back of the hall during the president’s speech. (There have been similar protests at Notre Dame, where the president is to speak at commencement exercises on May 17.) Mr. Obama, alluding to a parable at the end of the Sermon on the Mount, said he saw a new America whose foundations are built not on sand but on rock, "proud, sturdy and unwavering in the face of the greatest storm." "We will not finish it in one year or even many," he said, "but if we use this moment to lay that new foundation, if we come together and begin the hard work of rebuilding, if we persist and persevere against the disappointments and setbacks that will surely lie ahead, then I have no doubt that this house will stand and the dream of our founders will live on in our time."

U.S. Federal Reserve Chairman Ben Bernanke said Tuesday the latest figures on housing and consumer spending suggest a rapid contraction in the economy could be easing. "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles," Bernanke said in remarks prepared for delivery at Morehouse College in Atlanta. Bernanke is scheduled to deliver the speech at 1:30 p.m. EDT. The remarks, which were about the extensive actions the central bank is taking to stem the financial crisis, were posted on the Fed's website ahead of time.

Some recent reports have suggested a moderating of the economy's downturn but data on Tuesday was less encouraging, with the Commerce Department reporting retail sales fell 1.1 percent in March where economists had foreseen a 0.3 percent rise. Calling the current financial crisis the worst since the Great Depression, Bernanke explained the litany of emergency measures taken by the central bank and the Treasury Department with the aim of restoring battered credit markets. The Fed, which has cut interest rates effectively to zero, has also created a broad range of lending facilities to ensure that banks can remain above water despite massive losses from mortgages and other consumer loans.

Bernanke said some of the programs might one day have to be removed in order to prevent all the stimulus from building into an outright threat of inflation. "We have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time," he noted. "That said, unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for removing policy stimulus once the recovery is under way." That day was clearly not at hand quite yet, since Bernanke said the Fed was exploring an expansion of the types of credit made available through its program to restart securitization markets, known as the Term Asset-Backed Securities Lending Facility or TALF.

Bernanke did not specify what areas he had in mind, but analysts believe it would include bonds backed by commercial real estate, a sector that has been deteriorating quickly in recent months. The TALF so far has seen much weaker demand than the Fed had foreseen. While the central bank had allotted $200 billion in loans, only about $6.4 billion in deals have emerged in two auctions thus far. Bernanke took pains to justify actions taken to save insurance giant AIG, which has been embroiled in a controversy over lavish bonuses paid after the firm was already on taxpayer-funded life support.

He argued that the firm's collapse would have compromised the entire global financial system. Nonetheless, he argued that direct support to financial institutions and loans to investors would not compromise the taxpayer, or lead to the threat of inflation. "I can assure you that monetary policy-makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so," Bernanke said.

Singapore's economy plummeted nearly 20pc in the first quarter, its biggest contraction ever, flagging a miserable start to the year for other export-dependent Asian nations grappling with the worst global slump in decades. Gross domestic product in this wealthy Southeast Asian city-state plunged an annualized, seasonally adjusted 19.7 percent in the first quarter from the previous quarter and fell 11.5pc from a year earlier, both record drops, the Trade and Industry Ministry said Tuesday. The government now expects the economy to shrink between 6pc and 9pc this year from a previous forecast of a drop between 2pc and 5pc, the ministry said in a statement. The 2009 growth forecast has now been cut three times.

Singapore announced in January a $14bn (39.5bn) stimulus package, and the government may boost spending again in June to help bolster the economy, said Tai Hui, head of Southeast Asia research for Standard Chartered in Singapore. "We believe we are facing a Great Recession, but we are not going into a Great Depression," Mr Hui said. "We still expect to see some signs of stabilization at the end of 2009, although admittedly mild." The island's economy has already contracted quarter-on-quarter over four consecutive quarters. Singapore was the first country in Asia to report GDP figures for the January-March period, and its dismal showing suggests the region's most export-dependent economies — such as Japan, South Korea, Taiwan and Hong Kong — may face deeper and longer recessions than previously estimated. China announces preliminary first quarter GDP results on Thursday.

The city-state's central bank, known as the Monetary Authority of Singapore, said it lowered the center of its currency trading band, which was effectively a small, one-time devaluation of the Singapore dollar. But it said there was no reason for "any undue weakening" of the Singapore dollar. Standard Chartered's Mr Hui estimated the devaluation at 1.5pc. The central bank's inflation forecast for prices to fall as much as 1pc this year was unchanged. Non-oil exports, which accounted for about 60pc of GDP last year, fell 26pc in the first quarter from a year earlier.The ministry said it expects sales abroad to contract between 10pc and 13pc this year from a previous forecast of a drop of between 9pc and 11pc.

One bright spot was exports rose a seasonally adjusted 11pc in March from the previous month, the ministry's trade promotion agency, International Enterprise Singapore, said in a statement. March exports fell 17pc from a year earlier. Manufacturing fell 29pc in the first quarter from a year earlier while services fell 5.9pc. Construction rose 26pc. "Manufacturing was dragged down by the biggest, most synchronized collapse in world trade since the 1930s, which in turn has had some knock on consequences for services," said Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore. Imports fell 28pc last month from a year earlier and dropped a seasonally adjusted 4.7pc from the previous month, the ministry said.

Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data. The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade and the slumps in both have taken a heavy toll. Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.

He told the Financial Times he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008. "Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation," said Mr Cao, known as one of the "three swordsmen" of the real estate market because of his influence as an official economist. Average urban housing prices across 70 cities in China fell 1.3 per cent from a year earlier in March but were up 0.2 per cent from February, according to figures released on Monday by the National Bureau of Statistics. That broke seven months of sequential declines and was accompanied by a rebound in transaction volumes.

Residential property sales rose 8.7 per cent from a year earlier in the first quarter in terms of floor space sold, compared with a fall of 20.3 per cent for the whole of 2008. Real estate agents in the residential property bellwether of Shanghai said the market seemed to have bottomed out as a result of government stimulus measures, falling prices and pent-up demand from owner-occupiers.But Mr Cao said preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy.

Sales are also being driven by real pent-up demand from urban citizens, but Mr Cao said many were jumping into a false rebound because they had never seen house prices drop before.Before widespread privatisation of real estate began in the late1990s, most city dwellers were allotted housing by their work unit or by the state. The first private home mortgages since the 1949 communist revolution were granted barely a decade ago by state-owned banks. At a national level, average housing prices tripled between 2003 and the peak in mid-2008 and are now 10 to 12 times average income, which means 60 per cent of homebuyers’ monthly income must go to mortgage repayments, Mr Cao said. The volume of empty apartments across the country hit 91m sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. Those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587m sq m or apartments sold in the past five years but left empty by their owners.

Nicolas Sarkozy arrived at the Group of 20 summit having said: "The all-powerful market that is always right is finished." The French president left it proclaiming "a page has been turned" on the Anglo-Saxon financial model. Whether or not a page really has been turned depends on the construction of a practical successor to free-market economics, a process that entrenched interests in America and Britain would be well-advised to encourage if they wish to remain centre stage. The ideas that defined the golden age of market capitalism were formed in the vacuum left by the collapse of the Bretton Woods system of fixed exchange rates in 1971.

Over the next two decades, the Chicago School of free-market economists helped to persuade the Reagan and Thatcher administrations to adopt laisser faire policies and deregulation. Simultaneously, at Northwestern University, Professor Alfred Rappaport’s work on creating shareholder value clarified the objectives of the corporate sector. Management consultants took hold of these ideas and converted them to a coherent strategy for business. Then investment bankers, liberated by deregulation and with an eye to the main chance, picked up the whole package and sold it hard to chief executives. Once developments in derivatives theory in the 1970s opened the door to share options and performance-based compensation for executives, there followed three decades in which tooth-and-claw capitalism ruled supreme.

Conditions are now right for another radical rethink. The old model is busted. The big beasts of free-market economics, Britain and America, are more wounded than other species. Governments, central banks and regulators are groping unconvincingly for solutions. Against this background, new ideas should be welcomed. But for this to occur there would need to be a turnround in government attitudes on either side of the Atlantic, and a more effective and creative response from the academic sector in these countries than we have seen in recent years. A change in government thinking requires finance to be put back in its box. The industry gradually infiltrated the commanding heights of public life in America and Britain from the late 20th century onwards.

Senior bankers such as Robert Rubin, Jon Corzine and Hank Paulson upheld the American tradition of Wall Street titans taking public office. In Britain, the Conservatives’ connections with the Square Mile were well established, but the City was quick to build bridges with New Labour when it was elected to office in 1997 and the incoming government was equally eager to respond. Former investment bankers appeared in full-time positions at the Treasury, the government department that worked most closely with the City, and as chancellor of the exchequer Gordon Brown appointed City grandees to the business councils that advised him. The influence of finance over political life was reinforced by money. Wall Street bankers regularly appeared at the top of the giving lists for the political parties. In the UK, financial sector philanthropists donated to Labour and supported the government’s pet schemes, such as the Academies programme.

Others lined up behind the Conservatives, whose fundraising is led by two of the City’s most prominent people, Michael Spencer, chief executive of Icap, the world’s largest inter-dealer broker, and Stanley Fink, former chief executive of Man Group, the hedge fund manager. There is no suggestion of impropriety or that this enabled the industry to buy favour, it is just that in its pomp, finance became so important and so influential that it crowded out other voices. Similar forces were at work in the academic world, a sector that might have stimulated debate but which was conspicuous by its absence when it came to forming an effective critique of red-blooded capitalism. The few academics who suggested that markets did not always know best were dismissed by economic liberals as living in the past or told that the new financial system had "transformed risk" and raised global living standards.

Finance wrapped its tentacles around relevant parts of the academic world. Hard-pressed business schools competed for students eager to forge careers in finance after they completed their masters’ degrees. The quantitative skills of certain academics were sought by hedge funds that were prepared to pay them life-changing sums in consultancy fees. Rich alumni endowed their alma mater with benefactions to further the study of finance. The giving was well intended, and everyone has the right to pursue their career of choice, but under these circumstances it is little wonder that so much academic output was supportive of the financial system. But now is the time for change. Unless governments in America and Britain really open themselves up to new ideas, emerging economies in Asia and mainland Europe, places where alternative economic and corporate governance models do exist, will seize the initiative and redefine the global agenda. In parallel, academics need to recapture their heritage of creative, independent thinking and throw off the influence of finance. Wall Street and the City need to be grown up about this. They might not like the prospect of losing their grip on government and exposing themselves to new ideas. But unless they do, they might just find that the page has indeed been turned and they are no longer on it.

The wise men of Washington keep finding more core beliefs that we have to give up. First it was free markets. Now it’s democracy. The financial rescue may be the least popular big-ticket government program in history. If the U.S. Treasury decides it needs more money to keep the bailout going, it is anybody’s guess whether Congress would provide it. As a result, Treasury and the Federal Reserve have been running what feels to this lifelong student of fiscal policy like a scam. Many economists believe that helping financial institutions turn their less liquid assets into hard cash is a key step toward returning them to good footing. The best way to achieve that in a democracy would be for Congress to appropriate the funds to acquire the assets and for Treasury to borrow the money that it needs.

But Congress is unwilling to appropriate enough money, so Treasury and the Fed have cooked up a work-around: the Fed buys the assets instead. Since the Fed exists outside of the normal budget process, no permission from elected officials is required. Here’s a sketch of how it works. Many financial institutions have reserve accounts with the Fed. If one of them shows up with an asset it wants to ditch, the Fed takes it and ratchets up the balance in the reserve account. This means that the Fed is effectively summoning cash out of thin air to purchase the assets. In isolation, such a move might be inconsequential. But the scale of this end-around is enormous. The Fed’s balance sheet is closing in on $2 trillion and stands ready to skyrocket above that. Last month, for example, the Fed committed to buy more than $1 trillion in mortgage-backed securities.

This means that the Fed is printing cash at a rate that, while not threatening historic records set in Weimar Germany, promises to create substantial inflationary pressures once the economy revives. Therein lies the problem. At some point, when the economy begins to pick up again, the Fed will have to withdraw some of those reserves from the system before they ignite an inflation bonfire. Traditionally, the Fed might withdraw reserves by selling some of the Treasuries it owns. But the scale of the money creation is so grand this time that the Fed might not be able to sell enough Treasuries to meaningfully affect inflation without running up against the debt limit that Congress sets when it gives Treasury the authority to borrow money.

The Fed could, in principle, sell some of the assets it has been buying -- but if these assets were liquid, the Fed wouldn’t have been buying them in the first place. Which means it may be extremely difficult to get the cash out of the economy before it is too late. The Fed has cooked up a solution, though. Vice Chairman Donald Kohn, told an audience at the College of Wooster in Ohio that a possible solution would be for the Fed to issue its own securities, which might be called "Fed bills." Kohn argued that a key attraction of these bills is that they wouldn’t be subject to the debt ceiling set by Congress. In other words, the Fed wants to have unbounded authority to borrow money and buy assets without the inconvenience of having to explain itself on Capitol Hill.

The actions that have been taken already may indeed necessitate granting the Fed that authority. The cash is out the door, and at some point, the Fed will have to rake it back in. Congress may have to choose between giving the Fed the authority it wants, or having the mother of all inflation episodes. Should the Fed’s balance sheet climbs to $6 trillion, then its losses might be enormous and threaten to crowd out spending on defense, education and health care. And it would do so without Congress ever voting on the increase in the debt ceiling that would have been required if Treasury were performing the rescue. If the Fed receives the authority to issue debt whenever it wants to, then future bureaucrats can, in principle, play whatever financial games they want. The powerlessness of voters will be codified into law. We can’t let that happen.

It might be that voters are too stupid to understand that government officials should get as much bailout money as they desire. The financial rescue might have been precisely what the doctor ordered. But the public might be right as well. Our founders didn’t construct a democracy because voters are always right. Rather, they viewed democracy as better than the alternatives. While fully legal, the steps that have been taken by Treasury and the Fed have clearly been designed to insulate those institutions from the will of Americans’ elected representatives. In that regard, the damage from these actions probably exceeds the benefits. If we accept the view that we can be democratic in some areas but not others, then democracy will wither and die.

Moody's Investors Service on Monday cut its ratings on Ambac Financial Group's bond insurance arm into junk territory, after the rating agency increased its expectation of losses in residential mortgage-backed securities. Moody's cut Ambac Assurance, the second largest U.S. bond insurer, five notches to Ba3, three steps below investment grade, from Baa1. Ambac Financial Group was also downgraded six notches to Caa1, seven steps below investment grade, from Ba1. "The downgrade of Ambac's ratings primarily reflects weakened risk adjusted capitalization, as Moody's loss estimates on residential mortgage-backed securities have increased significantly," Moody's said in a statement. These higher loss estimates increase the estimated capital required to support mortgage exposures, Moody's said.

Ambac Assurance's claims-paying resources remain above Moody's expectation of losses the insurer is expected to take, but its cushion has been significantly eroded and losses in more extreme scenarios would exceed the company's resources, Moody's said. Ambac had around $3.5 billion of qualified statutory capital at year-end 2008, "but remains vulnerable to increases in case loss reserves over the near to medium term," Moody's said. Ambac Financial Group posted a $2.34 billion loss for the fourth quarter in February as it set aside more money for troubled mortgage debt. Moody's outlook on Ambac Assurance and Ambac Financial Group is "developing," indicating the rating may be raised, lowered or left unchanged. The outlook reflects the potential for further deterioration in Ambac's insurance portfolio, or the potential for government actions to stall the trend of increasing mortgage defaults, Moody's said.

President Barack Obama is expected to tap Fannie Mae Chief Executive Herb Allison to head the government's $700 billion financial-rescue program, people familiar with the matter say. In choosing Mr. Allison to head the Troubled Asset Relief Program, the administration is turning to an experienced manager at a time when it is having trouble filling key finance posts. Mr. Allison, 65 years old, is the former chairman of investment company TIAA-CREF and was a Merrill Lynch & Co. executive for years. In September, he agreed to run Fannie Mae after the U.S. took over the mortgage giant and its sister firm, Freddie Mac.

Mr. Obama could announce his intention to nominate Mr. Allison as assistant secretary for the Office of Financial Stability as early as this week. Mr. Allison would replace Neel Kashkari, a holdover from the Bush administration, who was asked by Treasury Secretary Timothy Geithner to stay on until a replacement was found. The selection will leave the administration searching for permanent leaders of both Fannie and Freddie. David Moffett, Freddie's CEO, announced his resignation last month. The Obama administration has had difficulty finding executives willing to serve as directors and executives of companies in the government's embrace, in part because of intense scrutiny of companies receiving government aid.

Mr. Geithner has been searching for months for someone to run TARP. Various candidates either have not made it through the vetting process or have pulled out of consideration. Last month, the leading candidate, hedge-fund manager Frank Brosens, withdrew for personal reasons. Mr. Allison has been on the short list from the beginning. His selection was complicated by several factors, including the need to replace him at Fannie, people familiar with the matter say. He spent most of his career at Merrill Lynch, eventually serving as president and COO. He became chairman of TIAA-CREF in 2002. As Fannie's CEO, he opted to take no salary or bonus. If confirmed, Mr. Allison will become point person for what has become an unpopular program. He'll have to defend plans for spending the program's remaining cash, and would likely represent the administration if it requests more bailout funds, which many observers expect.

A top Wall Street analyst warned today that a bankruptcy filing by General Motors Corp. seems more likely in part because the government may have to take some losses on its own loans to the automaker. Shares of GM were off 16% in trading this morning due to increased worries that the company would be forced to declare bankruptcy as part of the strategy crafted by President Barack Obama’s auto task force. GM and the Obama administration have been crafting a reworked turnaround plan and debt cut over the past couple of weeks aimed at further reducing the company’s debt burdens, including its obligations to UAW trust fund for retiree health care.

After failing to reach an agreement on a two-thirds reduction in debt, the Obama administration may push GM to offer only 20% of the stock in the automaker and no cash, according to published reports. The previous offer would have given the bondholders some money along with equity. JPMorgan analyst Himanshu Patel said the push for bankruptcy may be driven by growing worry that GM will never stabilize unless the government takes a reduction in its loans to the automaker along with bondholders and the UAW. "If the government has now truly realized that it will eventually have to ‘restructure’ its own loans to GM (similar to Citi or AIG), a bankruptcy may be much more politically necessary," Patel said in a research note. He also said new GM chief executive Fritz Henderson appeared far more open to the idea of bankruptcy than former chief Rick Wagoner.

Retailers have urged the Government to provide them with more assistance to keep shops occupied, as Whitehall unveils a £3m initiative today to try to prevent high streets from becoming ghost towns during the recession. Hazel Blears, the Community Secretary, will also unveil provisions to help local people or entrepreneurs temporarily convert empty shops into community projects or businesses, such as local art displays, to avoid high streets being boarded up. The provisions include special planning application waivers, standard interim-use leases, and temporarily leasing shops to councils that will allow the shops to get makeovers.

Experian, the information services company, believes that 15 per cent of high street shops, or 135,000 outlets, could be left empty by the end of the year, as retail administrations and financial woes force retailers to close stores. But the British Retail Consortium (BRC) said the way to prevent high streets becoming ghost towns is to remove burdens and help retailers survive in them. Stephen Robertson, director general of the BRC, said: "Art displays are not the answer for empty shops. We agree that vacant premises blight town centres. But contriving schemes to fill them with other users is tackling the symptom while ignoring the cause."

He singled out property costs as a key burden. Mr Robertson said: "Rather than offering empty shops for uses that are rates-free, wouldn't it be better to reduce the rates burden for struggling retailers?" The BRC won a victory for its members on 31 March when the Chancellor, Alistair Darling, modified plans to introduce a 5 per cent increase in business rates. As a result, business rates increased by only 2 per cent from 1 April, with the remaining 3 per cent rise being spread over the next two years, under new legislation unveiled by the Government. However, prior to Mr Darling's U-turn, the BRC had called for the Government to freeze new business rates and reverse its policy on empty property relief, which was scrapped in April last year.

At a seminar in Stockport today, Ms Blears will say: "Empty shops can be eyesores or crime magnets. Our ideas for reviving town centres will give communities the know-how to temporarily transform vacant premises into something innovative for the _community ... and stop the high street being boarded up." Entrepreneurs have begun many successful businesses from empty premises, such as Romy Fraser who started Neal's Yard Remedies from a disused warehouse in 1981.

HSBC faces a meltdown at its US credit card operations where around $50bn (£34bn) has been lent to people with poor credit histories, say analysts. Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet. Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.

Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red. HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".

There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value. Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.

Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products. At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets. Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.

As the number of nonperforming loans grows, the Russian government is beginning to take the threat to the country's banking sector seriously. Is the financial crisis in Russia coming to an end? Or is it just beginning? That seems to depend on who you listen to. In recent weeks, senior government ministers and officials have been striking an increasingly optimistic note amid signs the economic situation in Russia has stabilized. Russia's Prime Minister Vladimir Putin has been especially keen to emphasize the government's achievements in the banking sector. "Thanks to the actions of the authorities, the imminent threat of a banking sector collapse has been averted," he boasted to Russia's Parliament on Apr. 6. Indeed, it's no small achievement that, despite the financial turmoil of recent months, no major Russian bank has gone bust, and there have been minimal signs of depositor panic.

But in recent weeks, a chorus of doomsayers has been warning the stability won't last. A "second wave" of the crisis is about to hit Russia, they argue -- and the epicenter of this coming shock wave will be the Russian banking sector. The government now appears to be taking the threat seriously. It can hardly ignore the likes of German Gref, the chairman of Russia's largest bank, state savings bank Sberbank. In a conference presentation on Apr. 8, Gref pulled no punches when he warned of the scale of Russia's banking woes. "The banking crisis in Russia is in its very beginning," he said, accusing the government of "slow decision-making" in tackling the problem. Gref's comments echo similar remarks by Petr Aven, president of Alfa Bank, Russia's largest commercial bank, who has also caused a stir by warning that hundreds of Russian banks could face bankruptcy this year.

At the root of these worries is mounting evidence that, as the recession bites, Russian borrowers are struggling to repay bank loans. As a result, the share of nonperforming loans appears to be mushrooming. "A month ago, 15% seemed like a negative figure. Now people are talking about (the share reaching) 20% to 30%," says Natalia Orlova, banking analyst at Alfa Bank. She estimates that around 10% of loans are already bad, but expects the figure to reach at least 15% to 20% by the third quarter. The precise figure makes a huge difference, with the cost of recapitalizing the banks rising exponentially as the share of bad debts grows. According to estimates by Sberbank, if 10% of loans go bad, the government will need to inject some $6 billion to recapitalize the sector. But that figure skyrockets to $35 billion if the share of bad loans doubles to 20% -- and no less than $80 billion if the share reaches 30%.

True, it's still far from clear whether the bad loan problem is actually as bad as the pessimists fear. Elena Romanova, banking analyst at Standard & Poor's in Moscow, says that in general banks now regard around a third of loans as potentially "problematic." But it still remains to be seen how many of those loans will actually go bad and how many will be restructured. "The risk is serious," she says. "But it's difficult to say how the situation will develop in Russia, because we've never been through such a calamity before." It doesn't help that Russia's system of accounting differs in important respects from Western standards, recording unpaid loans (including loans on which the interest is unpaid), rather than estimating which loans are fundamentally unsalvageable. Richard Hainsworth, the head of the bank rating agency RusRating in Moscow, believes the level of bad loans stated in banks' statistics is exaggerated, because many loans fell due at the end of last year.

He argues that for all their apparent woes, Russian banks are in a fundamentally healthier state than their Western counterparts. Whereas Western economies were awash with credit in the runup to the crisis, finance in Russia has always been relatively scarce, allowing banks to be picky about whom they lent money to. "Any company trying to grow was making reasonable investment decisions, which is why the strength of the capital is also reasonable," says Hainsworth. "They weren't blowing the money on building golf courses." Indeed, the overall volume of corporate debt in Russia is currently around $780 billion, or some 52% of gross domestic product-a relatively modest figure. The bigger problem is that much of the debt is short term: Some $220 billion has to be repaid in the next 12 months, amounting to around 20% of GDP. The uncertain expense of recapitalizing the banks isn't the only conundrum now facing the Russian government. An equally perplexing problem is how to do this in a way that enables banks to restart lending money.

For all the efforts being made by the government to stabilize the sector, there's still precious little evidence that much of this is feeding through into increased finance for Russia's economy. Even for the best borrowers, Russian banks are currently demanding interest rates in the 15% to 20% range, more than most borrowers are prepared to pay. "The government is very ticked off that they provided so much money-so far some 2.5 trillion rubles ($75 billion) -- and the banks still haven't increased their lending," says Alexei Moisseev, an analyst at investment bank Renaissance Capital in Moscow. That's a conundrum governments are grappling with all over the world, not just in Russia. In Western economies, many have argued that regulators need to clean bank balance sheets not just by pumping in new capital, but also by transferring problem loans into special agencies-so-called bad banks. But in Russia, that idea has received a cool reception from the government, which argues the scheme will give too much discretion to public officials, making it vulnerable to corruption.

Instead, Russia is now mulling plans to recapitalize the banks by swapping specially created bonds in exchange for banks' shares. According to Moisseev, a member of the Expert Committee advising on the scheme, banks will be required to make 100% provisions for all problem loans, to be confirmed by an audit, possibly handled by private auditors or by Russia's deposit insurance agency. He estimates the scheme will cost around $30 billion. "The top 100 to 200 Russian banks will be well capitalized, so once there is a recovery in the economy they will restart lending," he says. But not everyone is convinced the remedy will work. "The best thing that the government could do is nothing," says RusRating's Hainsworth, who argues banks will only be forced to start lending again when the government stops providing alternative sources of cash. But he admits there are no easy answers: "How you restart lending after a crisis is a problem that not a single government in the world has yet cracked."

For the economic elite gathering in Rio de Janeiro on Tuesday at a regional meeting of the World Economic Forum, the city's hillside slums may loom even closer than usual. Recent boom years eased inequalities between the rich and poor. But now Latin America has plunged into a recession. That has leaders facing two tasks: boosting economic growth and improving the plight of the region's poor. Some answers are starting to emerge. Governments that can afford to are talking up huge public-works programs in an effort to create jobs while improving roads and ports. In Brazil, the government of President Luiz Inácio Lula da Silva recently unveiled a plan to build one million low-income homes. In nearby Chile, major spending programs are also under way.

This recession hasn't plunged Latin countries into unrest. But social conditions remain a worry. According to the Inter-American Development Bank, sluggish economic growth in Latin America and the Caribbean could send 2.8 million to 12.7 million people into poverty in the next two years. Poverty isn't the only resurgent worry. On participants' agendas are other unsolved issues, including Latin nations' weak education systems, complex tax codes, crime and oversized public sectors. "It's been a pretty good patch on the last five or six years. The worry now is that things are going back to normal," said Michael Shifter, vice president for policy at the Inter-American Dialogue in Washington.

Politically, the region's fortunes are important to the U.S., since a deep recession could invigorate populist movements like that in Venezuela. Forum officials said they expected the U.S.'s most important allies in the region, Mr. da Silva and the president of Colombia, Alvaro Uribe, to attend. Despite recent negative news, some investors believe the groundwork is in place for a comeback, thanks to the region's resource wealth as well as the banks, which are relatively unaffected by toxic assets. Citigroup Inc. predicted last week that Latin American stock markets, which touched a low in November, would begin climbing steadily again. "We expect another strong bull market in Latin American equities over the next four to five years," Citigroup's analysts said.

What always bothered me about Smith's speech isn't that it inaccurately describes humanity - it's quite accurate in that respect - but that it makes the inane claim that non-human forms of life develop an apparently harmonious equilibrium with the environment. This isn't actually true. Every form of life, humans apparently not excepted, grow to consume all the available resources in an environment until that species either dies back completely, having sustained an unrecoverable crash or having utterly depleted the environment of a necessary resource, or die back to a variable level constrained by a renewable resource. (And no, I don't think the intention of the speech was to finger this latter outcome as the competing possibility. I think it was just misinformed.)

Humans aren't any different from other animals in this respect, which is a profound enough realization.

Well then, all particles and force carriers are influenced by gravity, even the vector-bosons of the weak nuclear force can attain relativistic mass, photons have no rest-mass, their energy potential can be counted as relativistic mass when contained in a coherent system.

Quarks have rest-mass, but the bulk of their weight comes from interactions with gluons in quantum chromo-dynamics, which I don't understand at all.

The reason why I mentioned G in relation to the matrix is that its the only force that cannot be simulated without influencing the degrees of free-will inside the system, because Gravity is a primary recursive algorithm, the program always crashes when one decides to ignore the rules and just flies away.

Here we see the socio-economic significance of gravity as a force-carrier and means of control,and why all capital is ultimately bound to the workings of gravity, by extension to the laws of thermodynamics.

Human beings are worse than other animals. No other animal created nuclear weapons, right? Our brains allow us to commit the most heinous acts, but also the most virtuous acts (almost never collectively, though).

We have much to learn from other species. To realize our interconnectedness with all life, with other animals and nature would be progress, indeed.

My animals have taught me so much...

"Go confidently in the direction of your dreams! Live the life you've imagined. As you simplify your life, the laws of the universe will be simpler; solitude will not be solitude, poverty will not be poverty, nor weakness weakness." ~ HENRY DAVID THOREAU

A few posters at the top of today's TAE comments allude to something that is rarely discussed - why homo sapiens cannot return to a hunter-gatherer lifestyle.

What people ignore is that homo sapiens was too efficient, too good at being a hunter-gatherer. That efficiency led to the first population crisis about 10,000-12,000 years ago or so. Faced with an overpopulation problem then, homo sapiens exchanged 60+ year lifespans, a typical 4 hour "workday" gathering, an average of nearly 5 feet 8 inches in height, and near lack of chronic diseases for agriculture. The result was a 12 hour workday, seriously worsened skeletal density, a drop in average height of several inches, and the onset of chronic diseases coupled with virulent diseases from other species.

So why did homo sapiens make that swap? Because it allowed them to survive. Yes, survival was in a worsened state but it was survival.

But this is precisely why homo sapiens cannot return to a hunter-gatherer existence. He has "eaten of the forbidden fruit". He knows agriculture and won't forget it.

Mankind now faces a choice - find some new path with which to coexist peacefully with the rest of the ecosphere or to die off totally.

The financial ruin you see is a byproduct of centuries of pressure building right to this moment in time. This financial ruin is predicated on totally mythological beliefs, such as infinite growth, and infinite compound interest. These myths could be propagated only so long as the resource base was larger than the population that it was supporting.

Now that is no longer true and is beginning to be exposed for the lie that it is. And our history is why any return to our hunter-gatherer roots is impossible. Faced with the stress of too little food, too little gatherable acreage, we would resort to agriculture again as surely as the sun rises. Fools who believe in the promise of "collapse" to the point of return to the Olduvai Gorge don't understand that on that path lies extinction.

None of us here has any clear idea of what a successful future might look like which is all the more reason to hope that large monolithic governments do collapse and get out of the way to allow as many survival experiments as possible to be conducted.

There are hundreds of "post-carbon" communities around the world. Most of them are likely to fail. And that's fine. That's how natural selection does it's work. All it takes for us, as a species, is for one of those experiments to succeed.

NPR news had many faults, but it does have a damn good investigative reporter by the name of Daniel Zwerdling who is doing a two part series on how India's "Green Revolution" is turning into a catastrophe.

Animals are our superiors. We are just too entrenched in our own limited egos and narrow thinking to realize this fact. Habit and tradition keep us trapped in our small thinking patters. Pity that most cannot transcend the conditioned, small, self-centered mind. Were we able to - the obvious choice would be to leave the animals alone.....and learn from them.Many degenerative illnesses (due to meat consumption) would be eliminated and the planet would be much healthier.Live and let live. Take the leap....you'll be glad you did.

“The outlook for corporate earnings growth for the next five years or so is going to be materially lower than it has been in the past five years,” Andrew Milligan, the head of global strategy at Standard Life Investments, which oversees $181 billion in Edinburgh, said on Bloomberg Radio.

First Runner-up:

Losses in Goldman Sachs shares accelerated in the afternoon after S&P said the bank’s better-than-estimated earnings may not be sustainable.

Second Runner-up:

“The problem with the market is that we’ve had such a big move and the excitement may have gotten ahead of itself,” said Eric Green, director of research at Penn Capital Management, which oversees $3 billion in Cherry Hill, New Jersey. “The economy is certainly not in good shape.”

Humans are definitely a plague species. There's no doubt there, our exponential population growth, resource consumption and treating the planet as a garbage is going to come and bite us on the ass.

We have an instinctive desire for more, probably because humans are afraid of death. More stuff means we feel more comfortable about our inherent insecurity. Death is the greatest fear, be it the real thing, death of a relationship, death of growth, death of a friendship, death of people we know, death of our retirement accounts.

Simply because death is the great unknown. The great beyond. We simply can not grasp it. So we continue doing everything we can to delay the inevitable, we try and laugh away that we get old with, "we're young at heart" and "I exercise plenty!". The sad fact is, "Eat Healthy. Stay Fit. Still Die"

Ultimately we must confront this, whether by religion, spirituality or atheism. This is our journey as human beings, to come to terms with our mortality, our ignorance and ourselves.

BS: There are many situations where invading species overwhelm the enviroment. Locust Swarms, The Austrialan field mouse plague, Kudzu. A google search for "invasive species" will turn up millions of hits on problems created.

Man does the same thing as every lifeform does too. Man is just has the ability to exist everywhere on the planet, and has developed tools to exploit far more resources than any other lifeform on the planet. Man isn't even the most destructive force on the planet. There have been several events that wiped off more than 90% of all species on the planet, and have left the entire planet in ruins for eons.

Eventually the laws of Nature will take over causing dire conseqences for humanity. But the world and life will continue on the planet, no matter what we do. Sooner or later we will deplete too much of the essential resources to maintain our standard of living, and our large population. At some point, there will be a die off that culls the majority of the human population. No matter what humans do, we will always have a die off because the human population has exceeded the long term carry capacity of the planet. Consider that every day, humans consume about 400 years of natural resources.It takes 400 years for nature to produce the resources we consume everyday.

HUmans are the last chance of survival for all the animals, gaia and the fricking aliens. While the situation does not add up 1+1=Destruction, the chance that we might learn is still there. Self righteous finger pointing is the same as self righteous looting.

We loot, pollute, destroy the earth AND massacre billions of defenseless animals every year. All part of the same 'frickin' egocentric mindset.If we ain't learned by now sweetheart slim chance we're gonna.

Consider that the Sun uses loses 4 billion Kg of hydrogen per second. This inefficient monstrosity is of course made by humans. Not to mention Gravity and the likes. I am no proud that it is this particular generation stealing all the resources and the money from their kids, but the Reality it is not for the faint of heart with or without money. I think the humanity has reached a puberty phase when the guilt of touching the anonymous self subsides, maybe the new found knowledge will bring some pleasure.

Was struck by the sameness of the statements of the quoted government official, vis a vis every other government finance official, of any country (pick one):1. it's a recession, not a...uh, I can't say that word, not allowed.2. bogus prediction for "recovery" sometime in the near future.

It's like a mantra, but it doesn't inspire peacefulness and harmony...

BlackRock Confirms Goldman Q1 Profit Was Non-Recurring And A Result Of AIG Unwinds

Seems one of the egg-heads at Blackrock ratted out Goldman Sacks.

"Peter Fisher, managing director of BlackRock (yes, that BlackRock), states in a Bloomberg interview that Goldman's first quarter trading profit is non-recurring in nature, and believes it was mostly due to AIG unwinds"

RE: the meeting with VT's lite gov: Don't let Dubie get your hopes up. He is an acolyte of the Governor Doesless school of governing. I bet he nodded a lot and asked just enough questions to give the appearance of "active listening." The basic premise is to act like you care when confronted by the rubes, then skip off back to the Randian-Friedmanite wonderland of no taxes, drowned government, and magical self-regulating markets. The best you can expect out of him is a right-wing marketing campaign that uses some of your ideas as talking points. You'd be better off working in your community to create a local currency.

I hope there is someone in the .gov that our tax monies have paid for,just some 5th or 8th tier employee whom is as enraged as the rest of the population...working in justice,or treasury,or hell,the ag dept whom keeps a tab on all this filth.

And then some day,there is a accounting....

Very soon The O-man is going to need a lot of people to throw under the bus...to keep the wheels from falling off,so to speak.

When we see double digit[mid 20s]un-employment levels [that the .gov will admit to]they will need fast answers,and a lot of heads to put on sticks....to keep their own heads.....I had some startling news today.Oregon's un-employment hit 13.5% this month when like 30 days ago it was something like 11%.What we are starting to see is a almost exponential MONTHLY rise in un-employment....by percents....Say what? If this continues...15%by mid summer.20% by fall.What is screaming loudest in my ear is the fact this is going to blow sky high here...now. Think hard now kiddies..if the official rate is 15 %what is the u-6...or real rate?.probably 20-22%this is enough to crash things I think.And good god what about this fall. I had a long interesting talk with one of the owners,and the soon-to-be former President.

The last big project we had just folded

We have about 5-8% of the work we had this time last year.At this rate,they could downsize to 10% of what we had in the way of hands [115 field techs,30 office and management]and still have 30 hr weeks.There is just no work.Our competitors ate our lunch and dinner.

The term decimate comes to mind.Except 1 in ten lives,instead of meeting the sword.

I took Dimetri Orlovs advice a while back and began preparing myself for un-employment.This has been a hard shock ,true,but I am still here...and still moving.

The good news today...all the hives I checked were sound and doing as well as could be expected...